Help to Buy ISAs

The Help to Buy Individual Savings Account (ISA) was unveiled in the government's 2015 Budget and launched on 1 December of that year.

Savers have four years from that date to open an account, after which date they can continue saving until 30 November, 2029.

This type of ISA is solely for prospective first-time homebuyers and its big draw is that the government will top up the amount saved into one by 25%, with this bonus to be put towards the deposit on a home.

"This government is determined to help working people and encouraging the aspiration to home ownership is central to that," said Chancellor George Osborne.

As with alternative types of Cash ISAs, the other major advantage is that your savings interest will be free of tax.

While the scheme has proved very popular, it's being superseded - and, eventually, entirely replaced - by the Lifetime ISA, which became available to the under-40s from 6 April, 2017.

Who can get a Help to Buy ISA?

As the name suggests, Help to Buy ISAs are aimed at prospective homeowners or, more specifically, first-time buyers who must be over the age of 16.

This means they’re available to anyone who’s never owned a home before.

As with other types of savings and ISA accounts, couples are treated individually - that means if you're a first-time buyer but your partner isn't, you can still open a Help to Buy ISA and take advantage of the bonus.

If you're buying as a couple and are both first time buyers, you can each open a Help to Buy ISA and each receive the 25% top-up.

How much can I save in a Help to Buy ISA?

You can save up to £200 a month into a Help to Buy ISA and the government will then top up this amount by 25% - or £50 for every £200 saved - which you’ll receive at the time you’re ready to buy.

You’re also able to deposit a £1,000 lump sum upon opening a Help to Buy ISA and the bonus is payable on this, too.

The Help to Buy ISA bonus

The government’s 25% bonus contribution is capped at £3,000 on £12,000-worth of savings.

The bonus is tax free and it’s paid on both the amount the saver manages to put away and on the interest in their account.

Once opened, you can save into your Help to Buy ISA until 30 November, 2029, and you'll need to buy a property and claim your bonus by 1 December, 2030.

You can also claim your bonus as soon as you like, subject to a minimum bonus of £400, but as this would amount to a total deposit of £2,000 when combined with your savings it probably won’t buy you much real estate in today’s market!

Claiming the bonus

This bonus will be paid at the point you’re ready to buy your first home - you'll need to close your ISA account when you're ready to purchase and you'll receive a closing letter from the ISA manager.

You then give this closing letter to your solicitor, who in turn applies online for the government bonus.

The bonus is transferred to the solicitor, who then completes the purchase of your new home using the full bonus amount.

As there's some admin involved in this process, make sure you make your solicitor aware well in advance that you plan to use your Help to Buy bonus, so this can be planned into the timescales for completing your purchase.

Help to Buy ISA interest and availability

In many ways, Help to Buy ISAs operate in the same way as other ISA products, so providers have the freedom to administer them as they choose, offering their own interest rates and applying their normal ISA withdrawal rules.

The initial wave of Help to Buy ISA interest rates have been competitive, although it's important to remember that variable interest rates could change at any time.

Crucially, however, normal ISA transfer rules apply, which means savers are free to compare and switch providers to get the best deal.

How many Help to Buy ISAs can I have?

Each first-time buyer can only open one Help to Buy ISA.

However, as previously mentioned, they don’t have to stick with the same product through the lifetime of the scheme and can transfer out to a different provider.

If you’re buying with a partner, or with friends, you can each hold your own Help to Buy ISA and combine all your savings and bonuses into a single deposit.

Because it’s only possible to pay into one Cash ISA a year, holding a Help to Buy ISA will mean you won’t be able to pay into another Cash ISA as well.

What you can do is hold non-ISA savings accounts, a Stocks and Shares ISA and/or an Innovative Finance ISA alongside your Help to Buy ISA if you want to save more than £200 a month.

Some Help to Buy ISA providers have also found a way round the restrictions by allowing you to portion a Cash ISA into two sections, only one part of which benefits from the Help to Buy bonus.

Help to Buy ISA providers

Help to Buy ISAs are offered by high street and online banking providers that already offer ISA products, including Barclays, Lloyds Banking Group, Nationwide, NatWest, Santander and Virgin Money.

Providers are free to set their own interest rates so, as with any savings product, it’s a good idea to compare and shop around for the best option for you.

What type of home can I buy?

The government bonus can only be used within the UK and only to buy properties costing up to £450,000 in London, or up to £250,000 in other parts of the UK.

The property may be old or new, small or large, house or flat.

The bonus can only be used on a property that you’re going to be living in - it can’t be used for a buy-to-let house or flat.

If desired, it can be used in conjunction with the Help to Buy mortgage and other government shared ownership schemes.

Drawbacks of the Help to Buy ISA

Potential problems with the scheme include the suggestion that it’ll slow down the housing market by encouraging first-time buyers to delay purchasing until they’ve made maximum use of the government bonus.

It’s also been suggested that those making most use of the bonus will be people who could already afford a deposit anyway, meaning that house prices could potentially be driven up.

There's no way of knowing if rates for this new product will remain competitive compared with other ISAs - although taking the bonus into account is likely to make it one of the most profitable ways to save £200 a month.

However, that would also seem to be the main drawback of the Help to Buy ISA - you can only save a maximum of £200 a month, which could make amassing that deposit a slow process.

In fact, even if you take advantage of the initial £1,000 lump sum allowance, it would take four years and seven months of paying £200 a month before you could claim the full £3,000 bonus.

As you can’t hold another Cash ISA alongside the Help to Buy ISA, the £200 a month limit may also prevent you from taking full advantage of your full annual Cash ISA deposit limit (as noted above, some providers have found a way around this).

Finally, bear in mind that the bonus can only be used to buy a home - not for anything else. Of course, the money you’ve saved is yours to do with as you wish, as is the interest, but if you withdraw it and spend it on something other than a home, you won’t get the bonus payment.

Transferring savings from a Help to Buy ISA to a Lifetime ISA

In the March 2016 Budget, Chancellor George Osborne unveiled plans for the new Lifetime ISA, which became available for those aged 18-40 on 6 April, 2017.

Holders of Help to Buy ISAs can open an additional Lifetime ISA, but they’ll only be able to use the bonus on one of the accounts when they buy their first home.

During the 2017-18 tax year only, if you have a Help to Buy ISA you’ll be able to transfer savings held in it to a Lifetime ISA and still save an additional £4,000.

After that, any Help to Buy ISA funds that were saved before the introduction of the Lifetime ISA on 6 April, 2017, will count towards the Lifetime ISA annual contribution limit if they're transferred in.

By Derri Dunn